David R. Henderson  

Who Will Build the Roads?

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Is that even the right question?

Often, when believers in economic freedom advocate economic freedom, questioners and skeptics ask us, "But if you didn't have government doing it, who would build the roads?" My guess is that most such questioners are sincere. They've grown up in societies where the government has had the primary responsibility for building roads and so they have trouble conceiving of a society in which individuals and companies build, maintain, and operate roads. That's the tyranny of the status quo, to use a term that Milton and Rose Friedman used as a title of one of their books.

But in a recent case in Britain, where a road was closed by a landslide, drivers had to take a 14-mile detour. And the government was taking its sweet time cleaning up the mess. Enter Mike Watts and his wife, who decided to build a road only 400 meters long to get around the landslide. They put a 2-pound toll on it. The road was built in 10 days.

And it's working. People are using it and it's bringing in substantial revenue.

There is one fly in the ointment: government. Government virtually never likes people competing with it. And so the local authorities, although they haven't regulated the road out of existence, have made Watts and his wife apply for "retrospective planning permission." [There does appear to be one possibly legitimate reason: their concern that construction and driving on the road would affect the part of the road where the landslide had happened.]

HT to Stephanie Slade.


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COMMENTS (36 to date)
Commander writes:

Great post, one error, however:

"Government virtually never likes people competing with it."

should be

"Government never likes people competing with it."

John B writes:

In 18th and 19th Century Britain, waterways, paved toll roads then railways were built with private money, to get raw materials and finished goods more efficiently to and from mines/mills/factories/ports/cities.

These were often the result of the businesses involved creating the companies to build the infrastructure.

In France toll autoroutes are either built with private money or some built by the Government and sold to private enterprise, also more than 50% of health care provision is private.

If infrastructure can be provided in such an ideologically socialist, dirigiste place like France by private enterprise, then surely it can be, anywhere.

David R. Henderson writes:

@John B,
Good points. Thanks.

Andrew_FL writes:

People seem to prefer paying a tax they don't even know they are paying (how many people actually know how much of the gas price they pay goes to the government?) to paying tolls they can see they are paying. It is, as Bastiat said, "Seen and Unseen."

And therein lies great difficulty. People will resist the idea of privatized toll roads for precisely that reason: there perception of roads provided by the government is of a free lunch.

Chris Wegener writes:

So since Great Britain drivers drive on average 10,762 km of roads each year at a rate or 2 pounds per 400 meters would mean each average motorist would pay 53,000 pounds to drive in any given year.

That'd work. I am sure everyone would happily pay that much to eliminate the Government involvement in road building.

david condon writes:

Ditto, Chris Wegener. That road works because they have a monopoly on the best route. I don't see how a purely private road system avoids widespread monopolies.

Greg Heslop writes:

Then again "all roads leads to Rome", no? No monopolies there!

The issue with private roads as far as I can tell is the fact that the marginal cost is less than the average cost. This is far from an insuperable impediment, however, as one might imagine providers of private roads selling permits to their clients, which enable use of the roads at a small or possibly zero toll. (Cf. Ronald Coase, 'The Marginal Cost Controversy', Economica, 1946.)

Gene Marsh writes:

Great post, one error, however:
"Government virtually never likes people competing with it."
should be "Government never likes people competing with it."

This kneejerk compulsion to drive all nuance out of libertarian speech is the one of the biggest obstacles libertarians face. If its got to be all or nothing, you'll get nothing and deserve nothing.

Gene Marsh writes:

Great post, one error, however:
"Government virtually never likes people competing with it."
should be "Government never likes people competing with it."

This kneejerk compulsion to drive all nuance out of libertarian speech is one of the biggest obstacles libertarians face. If its got to be all or nothing, you'll get nothing and deserve nothing.

Commander writes:

Fine Gene, just show me an example where government is ok with surrendering its monopoly over something.

Commander writes:

BTW Gene, who said I'm a libertarian?

Mike writes:

Some public transportation in Massachusetts started as private transportation--see

http://en.wikipedia.org/wiki/Massachusetts_Bay_Transportation_Authority

A friend who is a bit of a public transportation wonk told me about that. Fascinating :)

David R. Henderson writes:

@Chris Wegener,
Your extrapolation from this case is absurd. They charged 2 pounds for 400 meters because it saved 14 miles. And notice that they added an option. If that hadn’t made people better off, people would not have used it.

Rich Berger writes:

Expanding on Professor Henderson's reply, I find that fuel costs about $4.85 per gallon in the UK. If a car gets 30 MPG, the detour costs about $2.25 in fuel; the actual cost may be higher if the speeds are lower. The toll is 2 pounds or roughly $3.22 at current exchange rates. I am guessing that the cost of the driver's time and wear and tear on the car is worth a dollar and it appears that many drivers agree by paying the toll to take his road. Also, it appears that Mr. Watts ventured 300,000 pounds to build this road which will probably be viable for a limited time, so the 2 pound toll does not seem unreasonable.

I live in a private association that maintains its own 13 mile network of roads, at a cost of $100 per year in dues, so I can see the feasibility of private roadways. Not all roads have to be toll roads to be privately built.

Daniel Kuehn writes:

David and Rich - I think you're missing Chris and David Condon's point. Of course there's value in the road - otherwise people wouldn't pay the toll. The point is if you do the extrapolation you realize how expensive it is. Why is this valuable thing so expensive? Because the monopolist provider - by dint of being a monopolist - can capture a whole lot of the surplus.

Don Boudreaux writes:

Daniel:

You seem to miss the lesson of the 1871/74 marginal revolution.

quadrupole writes:

Daniel,

There is also a marginal thought here.

Drivers do not have to pay a cost for the *rest* of the road that is made usable by the 400 meter toll segment... so what they are paying for is the value of the entire route to them in toll... but the 400 meter toll road is capturing all of value there. Its not just being a monopolist, its being the reaper of the value at margin of something larger.

(note: I am not condemning them with the above observation... just noting it ;) )

Gene Marsh writes:

show me an example where government is ok with surrendering its monopoly over something.

The list is extensive, but under "p" you've got parking meters, prisons and the public utilities.

My least favorite would be the private military industry.

Tracy W writes:

On the cost of the toll road, the owners are presumably only expecting to be paid tolls until the landslide is removed and the normal route fixed, so the cost will be higher to cover the temporary nature of said road.

Probably the construction costs were somewhat lower because the road's not expected to be carrying that much traffic indefinitely, but I'd be surprised if they were *that* much lower.

Daniel Kuehn writes:

Don Boudreaux -
Quite sure I haven't. You might be misunderstanding me. Could you get a tad more specific than accusing me of missing the foundation of all modern economics?

Daniel Kuehn writes:

quadrupole -
re: "Its not just being a monopolist, its being the reaper of the value at margin of something larger."

Exactly - the route is valuable. But the ability to capture a lot of the surplus comes from the exclusive right to that section of road. It would be true of any section of the road of course, this is just the spot where it's possible to exercise it given the circumstances.

Rich Berger writes:

The main road has been useless for travel since the "landslip" which occurred in February. The solution that the council came up with was the 14 mile detour - according to Mike Watt the detour can take up to an hour to travel over roads which were not intended for heavier traffic. So the main road was essentially valueless for those who used it to travel between Bristol and Bath.

Mr. Watt decided to stake his own money in building the road in August - 150,000 pounds to build it. He made the valueless road valuable again - he did not "capture" the surplus. He knew that he would have limited time to recoup his investment and he set his toll accordingly.

As far as Chris Wegener's silly extrapolation, by his logic I would never take a cab in the city because it would be so costly to do all my trips that way. It would be terrible to stay in a hotel because it would be very expensive to live in one 365 days a year. It would be terrible to pay $500 for a fine meal because it would tremendously expensive to eat all meals that way. The toll road takers assessed the cost of 2 pounds to shorten one trip - that is what the decision at the margin means. You don't buy a year's worth of travel (or food or lodging) but just the current one.

One would think that the council could have built this road themselves but they didn't. It would probably have been seen strictly as a cost - who cares about the citizens? I suspect Mike Watt has also put pressure on them to finish quicker - he has certainly shone a light on their sluggish response. But he seems to be a very pleasant, even tempered man and is working with the planning commission to comply with their regulations. Most likely the road will be superfluous by the time they are done.

When DK speaks of "capturing" the surplus, he begs the question. Mr. Watt has not captured but created value where it was missing. That is the essence of entrepreneurism. Redistributionists like DK see wealth and value as something that exists independent of creation, and the wealthy were just quicker to grab it and shove the poor aside. You didn't build that!

Daniel Kuehn writes:

Rich Berger -
You are getting way too worked up over the word "capture". There is a surplus generated by the exchange. Watts "gets" it "earns" it, or whatever other word you want to use to describe it because it's the only one of its kind.

All I'm doing is shading in the space between the curves on the chalkboard - calm down. Watts is the good guy here.

The council could be the good guy too if they wanted to but it seems they don't want to.

NZ writes:

A lot of the spontaneous order that libertarians love to talk about assumes that the people involved are orderly. This is one of the assumptions libertarians make a little too often.

The Kenston toll road was in rural (or at least exurban) England, east of Bristol. What would have been the outcome if this situation had happened in, say, East St. Louis?

RPLong writes:

Kuehn:

If you accept Wegener's extrapolation, then you end up conflating a marginal cost with an average cost. I believe this is what Prof. Boudreaux had in mind.

In fairness, however, I don't think this extrapolation is absolutely necessary to the thrust of your argument.

Damien writes:

John B:

If infrastructure can be provided in such an ideologically socialist, dirigiste place like France by private enterprise, then surely it can be, anywhere.

This is actually a pretty bad example. Until 2005, the government owned the toll roads that were being operated reasonably efficiently (how many ways are there to cut costs? You have a road and toll booths, that's about it. Okay, maybe you can have some automation and the private sector is extra efficient at maintaining the roads, but why not just outsource this with a competitive tendering process?).

Then, the French government decided that it needed to reduce its public debt to meet EU requirements. They sold off these assets at greatly undervalued prices that even surprised some of the bidders, who would have been willing to pay 30%-40% more.

The French government basically gave a huge gift to cronies: executives of large French companies, high-ranking civil servants, and French politicians probably have more connections than in any other developed country. They all graduated from the same 'grandes écoles' and France is the only country where a large proportion of CEOs of large companies spend a few years working in the public sector.

So rent-seekers got a good deal at the expense of the taxpayer, who got a very bad deal out of the sale of these assets. I doubt that French drivers have noticed how nicer the roads have now become (they haven't) or the great cost-savings that greater efficiency brought about (none, the government also granted tariff increases). Toll roads are now one of the most profitable industries in France. It helps when the huge fixed costs have already been borne by the taxpayers.

Chris Wegener writes:

Since the supposition is all roads would be provided privately how is it unreasonable that the charges for their use would be far higher than government provided roads?

All roads, being privately provided, there would be no alternative available to avoid the toll? What mechanism would anyone postulate that would provide less expensive alternatives?

Does anyone here seriously argue that a world in which only private roads exist there would be less expensive alternatives. The only organizations capable of providing roads would only be interested in their own profit and would not serve smaller communities and would charge as much as they could squeeze out of those who need to use the roads.

I have lived on an island where the roads for the development I lived in where on average $5,000 per year over fifteen years to build the system completely. Even then there where people who lived closer to the entrance to the development who were unwilling to pay once the road passed their house, how would this be different if all roads were private?

Chris Wegener writes:

@Rich Berger

Sorry about the "silly" extrapolation. Your example of cabs and hotels is exactly the case. In each choice you have an alternative. In the world of private roads there would be no alternative.

Daniel Kuehn writes:

RPLong -
I don't confuse that at all.

The point is not - as far as I can tell - that the extrapolation is what will hold. It's an illustration of how high this toll is. And the reason why it's high is fairly obvious, as David Condon points out.

If you think Chris Wegener is arguing that that would be the actual fee structure - and not just making a general point about how expensive this toll is (as David Condon and I have been quite clearly interpreting him), then you might have an argument with him. But I haven't claimed anything like that. I sort of doubt he is claiming that, but you can take that up with him.

Daniel Kuehn writes:

Chris Wegener -

"Since the supposition is all roads would be provided privately how is it unreasonable that the charges for their use would be far higher than government provided roads?"

It's one thing to say it would be higher, but there's no reason at all to think it would be the same rate as this little road maintained by Watts.

Otherwise I think your hesitations about exclusively relying on private roads are on target.

Charley Hooper writes:

I live in an area where many of the roads are privately built and maintained because they are roads through housing developments. In fact, I'm on the board of the road association (two miles of roads) where I live.

It works quite well and I've heard that our annual maintenance expenses are half what the government charges taxpayers.

Of course, we don't have to worry about charging outside drivers because our roads are dead ends.

Daniel Kuehn writes:

Charley Hooper -
Sure, but maintaining asphalt in a housing development is naturally going to cost less than maintaining an interstate or even just a well-traveled main road. I've never seen any work done on my (residential, single-family homes, suburban) street and I imagine the maintenance costs are well below those of the main road just a a few blocks away running through the downtown area and connecting the community to the DC beltway. Those costs don't really really say much about the relative efficiency of whoever maintains the roads since it's the same people that maintain both roads!

Rich Berger writes:

I think this thread is fading, but I had one further question for DK: what is the nature of this surplus you refer to?

RPLong writes:

Kuehn: Excellent. Then we agree that you reject Wegener's extrapolation, but agree with his over-arching point; and we further agree that there is no need to accept this extrapolation in order to make this point.

Daniel Kuehn writes:

RPLong - I dunno, I still think it's a good extrapolation to make the point (your third thing). But two out of three ain't bad.

Rich Berger - user value minus producer cost. Sometimes consumers capture more of that surplus, sometimes producers do.

Rich Berger writes:

DK-

First, how do you measure user value? Second, what is production cost? Third, why shouldn't producers be able to earn a profit (i.e., return above their production cost)? In Mr. Watt's case, he took a risk that he would not recover his costs. A return in excess of his costs is his reward for the risk. Given that the road users have freely paid to use it, their behavior indicates that they value the use of the road more than the toll that they paid. As in all voluntary transactions, it's a win for both parties!

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